Where to put the money saved for home down payment?

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wyoming82240
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Where to put the money saved for home down payment?

Post by wyoming82240 » Wed Nov 27, 2019 12:21 am

Dear Bogleheads,

I have set aside money for down payment of home purchase. My plans have changed, I may not buy home in the next 4-5 years or so. Currently the money is in Wealthfront savings account (1.82% yield). What are the other investments options available to put this money in best use for the 4-5 year time horizon :?. Thanks in advance for your thoughtful suggestions.

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Re: Where to put the money saved for home down payment?

Post by HomeStretch » Wed Nov 27, 2019 12:26 am

For money needed in < 5 years, a high yield savings account, CDs, treasuries or money market fund are all appropriate.

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Re: Where to put the money saved for home down payment?

Post by anon_investor » Wed Nov 27, 2019 12:30 am

HomeStretch wrote:
Wed Nov 27, 2019 12:26 am
For money needed in < 5 years, a high yield savings account, CDs, treasuries or money market fund are all appropriate.
+1.

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Re: Where to put the money saved for home down payment?

Post by Lee_WSP » Wed Nov 27, 2019 12:55 am

Depends on your risk tolerance. If you are okay with an 8% worst year & 19% drawdown, you can stick it into Wellesley. If you want to halve that, you can do 50% Wellesley & 50% total bond. 4% worst year & 8.37% max drawdown.

https://www.portfoliovisualizer.com/bac ... ion2_3=100


Otherwise, you're best off with just total bond. Tiny risk of a drawdown, but the returns are worth it. You can still even buy the house during the drawdown since it's so small.

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Re: Where to put the money saved for home down payment?

Post by quisp65 » Wed Nov 27, 2019 9:12 am

I would try to find a 5 year CD that has a 90 day early withdrawal penalty when at the 1 year mark. Since you might need the money in 4 years.

https://www.depositaccounts.com/cd/5-year-cd-rates.html

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Re: Where to put the money saved for home down payment?

Post by livesoft » Wed Nov 27, 2019 9:15 am

For money with an unplanned unknown-term goal, I just put it into my overall asset allocation. We did that before we bought our first home and had enough invested to pay cash for a home. But we didn't pay cash, we made a 20% down payment and got a mortgage leaving the other 80% invested.

It is actions like the above that allowed me to become financially independent around age 50.
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Re: Where to put the money saved for home down payment?

Post by KlangFool » Wed Nov 27, 2019 9:23 am

livesoft wrote:
Wed Nov 27, 2019 9:15 am
For money with an unplanned unknown-term goal, I just put it into my overall asset allocation. We did that before we bought our first home and had enough invested to pay cash for a home. But we didn't pay cash, we made a 20% down payment and got a mortgage leaving the other 80% invested.

It is actions like the above that allowed me to become financially independent around age 50.
+1,000.

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wyoming82240
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Re: Where to put the money saved for home down payment?

Post by wyoming82240 » Wed Nov 27, 2019 1:19 pm

Thank you, I m planning to put half in CD and other half in FBND or IUSB based on your suggestions.

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Re: Where to put the money saved for home down payment?

Post by BogleMelon » Wed Nov 27, 2019 1:30 pm

I cap my cash to $50K (between Ally 11mo no penalty CD and Fidelity mm fund). Anything over than that I invest it 70% bonds-30% stocks. No matter what goal it is earmarked for as long as it is not for retirement goal.
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Re: Where to put the money saved for home down payment?

Post by asahopkins » Wed Nov 27, 2019 1:37 pm

We have used Vanguard LifeStrategy Income (VASIX) for this purpose -- 80% bonds, 20% stocks. This has been a good choice for us, with returns generally higher than an insured account, and very little downward fluctuation, and "set it and forget it" with respect to asset allocation, all in one fund.

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Re: Where to put the money saved for home down payment?

Post by rascott » Wed Nov 27, 2019 1:41 pm

https://investor.vanguard.com/mutual-fu ... estrategy/#/


Pick one that fits your comfort zone.

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Re: Where to put the money saved for home down payment?

Post by retiredflyboy » Wed Nov 27, 2019 2:09 pm

I always try and keep things as simple as possible so I would just stay where you are or any other online high yielding bank or something like Vanguard Prime Money Market. I am keeping some dollars liquid for a purchase of some farm land but only after the sell of some other land. I have that all in Vanguard Prime Money Market fund. You can certainly do a 5 year CD or short term bond fund, but have personally just not found it worth the effort and slight risks for a relatively small gain if any.
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Re: Where to put the money saved for home down payment?

Post by goodenyou » Wed Nov 27, 2019 3:08 pm

livesoft wrote:
Wed Nov 27, 2019 9:15 am
For money with an unplanned unknown-term goal, I just put it into my overall asset allocation. We did that before we bought our first home and had enough invested to pay cash for a home. But we didn't pay cash, we made a 20% down payment and got a mortgage leaving the other 80% invested.

It is actions like the above that allowed me to become financially independent around age 50.
Would you do the same in retirement? In other words, would you take out a mortgage or pay cash if you had no earned income or were going to retire in a few years? I am about to build a new home, have enough to purchase it outright, and have enough left over for retirement if I were to purchase it. I am debating whether to take a low-interest mortgage, if it is still low in the very near future, or just buying it outright.
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Re: Where to put the money saved for home down payment?

Post by livesoft » Wed Nov 27, 2019 3:13 pm

^I'd plan to take out a low-interest mortgage. A mortgage gives me the option to invest until I want to pay it off later. I would only pay it off early if my investments were 2 to 3 times or more the interest rate. That is, the option is worth quite a lot of money.
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Re: Where to put the money saved for home down payment?

Post by grabiner » Thu Nov 28, 2019 10:39 pm

goodenyou wrote:
Wed Nov 27, 2019 3:08 pm
livesoft wrote:
Wed Nov 27, 2019 9:15 am
For money with an unplanned unknown-term goal, I just put it into my overall asset allocation. We did that before we bought our first home and had enough invested to pay cash for a home. But we didn't pay cash, we made a 20% down payment and got a mortgage leaving the other 80% invested.

It is actions like the above that allowed me to become financially independent around age 50.
Would you do the same in retirement? In other words, would you take out a mortgage or pay cash if you had no earned income or were going to retire in a few years? I am about to build a new home, have enough to purchase it outright, and have enough left over for retirement if I were to purchase it. I am debating whether to take a low-interest mortgage, if it is still low in the very near future, or just buying it outright.
You have to decide whether paying off the mortgage (or, equivalently, not taking it out) is a better deal than your alternative use of the money. You could buy a bond portfolio which makes your mortgage payment every month; if this costs more than the mortgage balance, is the liquidity and the option to refinance your mortgage worthwile?

If you are considering taking out a mortgage, the rate to use for comparison is the mortgage APR; you would have to invest in bonds yielding an amount equal to the APR to break even. If you already have the mortgage, then you should use the interest rate for comparison. (The difference between the two is that if you avoid taking out the mortgage, you avoid the closing costs, so the uninvested amount of money is less than the mortgage balance.)
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Re: Where to put the money saved for home down payment?

Post by mx711yam » Thu Nov 28, 2019 10:43 pm

Similar situation, I put half in Wellesley, half in first foundation bank at 2.4%.

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Re: Where to put the money saved for home down payment?

Post by grabiner » Thu Nov 28, 2019 10:47 pm

livesoft wrote:
Wed Nov 27, 2019 3:13 pm
^I'd plan to take out a low-interest mortgage. A mortgage gives me the option to invest until I want to pay it off later. I would only pay it off early if my investments were 2 to 3 times or more the interest rate. That is, the option is worth quite a lot of money.
I believe you have stated the math backwards here. If your low-risk investments earn more than the interest rate, it doesn't make sense to pay off the mortgage, as you come out ahead by keeping those investments and using them to make the mortgage payments as needed. If your investments earn substantially less than the interest rate, then you would come out ahead by selling those investments to pay off the mortgage, so that is the situation in which you have to weigh this gain against the benefits of the optionality (you can refinance or pay off your mortgage if it still exists) and liqudity.

Also, I don't believe a ratio makes sense; it should be a percentage difference. The gain from selling 4% bonds to pay off a 5% loan is the same as the gain from selling 2% bonds to pay off a 3% loan. It is reasonable to value liquidity and optionality at that 1%, but this is a personal decision, particularly for the liquidity.
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Re: Where to put the money saved for home down payment?

Post by Ben Mathew » Fri Nov 29, 2019 12:30 am

Earmarking money for a specific goal and choosing investments tailored to the time horizon of that goal (with shorter horizons calling for safer investments) is a popular strategy. But it is problematic for two reasons:

- First, money is fungible. As far as possible, it is best not to earmark funds for specific purposes. The portfolio should be thought of as a whole, and the investment allocation should be based on how it would affect your consumption over your entire lifecycle. This usually means that even if your total investments perform badly in the short run, your short term plans won't be affected any more than your long term plans. In your situation with the house downpayment, if you lose money in riskier investments, then yes, that would mean a smaller house or a delayed purchase. But these adjustments are no worse than those required by your long term needs like retirement spending. There is no benefit to staying excessively safe in the short term.

-Second, time horizon is not inversely related to the ability to take risk. This is a myth based on a misinterpretation of the fact that that average returns average out over longer time horizons. But you don't eat average stock returns. You eat gross stock returns, which don't average out over time. They add up. Long term horizons do not call for higher proportion in stocks, and short term horizons do not call for a lower proportion in stocks. A person with CRRA utility will choose the same proportion for any time horizon.

What really determines AA is your risk aversion and where you are in your lifecycle. If you are young, the lifecycle model tells us that you are likely underinvested in stocks. If so, you should probably be 100% stocks. That would include money you need in the near term (like the downpayment on the house), as long as it doesn't cause a cash crunch.

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Re: Where to put the money saved for home down payment?

Post by alluringreality » Fri Nov 29, 2019 11:59 am

Ben Mathew wrote:
Fri Nov 29, 2019 12:30 am
- First, money is fungible. As far as possible, it is best not to earmark funds for specific purposes. The portfolio should be thought of as a whole, and the investment allocation should be based on how it would affect your consumption over your entire lifecycle. This usually means that even if your total investments perform badly in the short run, your short term plans won't be affected any more than your long term plans. In your situation with the house downpayment, if you lose money in riskier investments, then yes, that would mean a smaller house or a delayed purchase. But these adjustments are no worse than those required by your long term needs like retirement spending. There is no benefit to staying excessively safe in the short term.
I'm being a bit obtuse on purpose here, but personally I can't make practical sense out of this comment. You say a downturn might result in a "smaller house or a delayed purchase", yet then say there is "no benefit" to the idea of limiting downside risk for a period of time. Being able to follow through on a plan may be a benefit compared to being unable to follow through as a result of questionable planning, and not hitting a limited-term goal could be problematic for less esoteric reasons. Depending on personal importance, targeting a certain purpose could mean a reasonable plan might be to essentially remove that money from other purposes, as if it had already been spent. The quote appears to intentionally increase the near-term volatility or downside risk in the situation, while seeming to downplay that fact. If someone was targeting a constant risk and considering a portfolio as a whole, they might also have the option to increase risk of other accounts to compensate for how they're intentionally limiting potential volatility with part of their portfolio.

My own specific purpose of retaining indefinite safer types of funds is for the possibility of a job loss. That happened after 2008, and it took about 3 years to return to similar income. My current employment is probably no less tied to the economy. Having funds that will not tend to fall in an economic downturn makes sense to me in a practical sense. It also allows me to take more risk in the accounts that I've earmarked for retirement, since I probably won't need to touch that money for a much longer period of time. With a smaller portion retained for an economic downturn, I would just transfer that reduced risk into the accounts currently earmarked for retirement, since I might be forced to draw from the retirement accounts in a downturn. While I understand it makes sense to avoid being too cautious, personally I don't see the point of increasing downside risk in an account with a designated purpose without considering other accounts or individual considerations.

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Re: Where to put the money saved for home down payment?

Post by Ben Mathew » Fri Nov 29, 2019 3:12 pm

alluringreality wrote:
Fri Nov 29, 2019 11:59 am
You say a downturn might result in a "smaller house or a delayed purchase", yet then say there is "no benefit" to the idea of limiting downside risk for a period of time. Being able to follow through on a plan may be a benefit compared to being unable to follow through as a result of questionable planning, and not hitting a limited-term goal could be problematic for less esoteric reasons. Depending on personal importance, targeting a certain purpose could mean a reasonable plan might be to essentially remove that money from other purposes, as if it had already been spent. The quote appears to intentionally increase the near-term volatility or downside risk in the situation, while seeming to downplay that fact. If someone was targeting a constant risk and considering a portfolio as a whole, they might also have the option to increase risk of other accounts to compensate for how they're intentionally limiting potential volatility with part of their portfolio.
It's best to spread risk as much as possible over all of your goals. So it typically wouldn't make sense to reduce the risk on short term goals relative to the general level of risk you're taking with all of your other goals. There is no reason why short term planned consumption should be more sacrosanct than long term planned consumption, unless the short term planned consumption is hard to adjust (for example, reducing housing expenses in the near term is hard because it would involve moving). But as far as possible, it's best to spread the risk evenly across all horizons.
alluringreality wrote:
Fri Nov 29, 2019 11:59 am
My own specific purpose of retaining indefinite safer types of funds is for the possibility of a job loss. That happened after 2008, and it took about 3 years to return to similar income. My current employment is probably no less tied to the economy. Having funds that will not tend to fall in an economic downturn makes sense to me in a practical sense. It also allows me to take more risk in the accounts that I've earmarked for retirement, since I probably won't need to touch that money for a much longer period of time. With a smaller portion retained for an economic downturn, I would just transfer that reduced risk into the accounts currently earmarked for retirement, since I might be forced to draw from the retirement accounts in a downturn. While I understand it makes sense to avoid being too cautious, personally I don't see the point of increasing downside risk in an account with a designated purpose without considering other accounts or individual considerations.
Let's look at a simple example. John retires with $1 million invested in safe assets that yield zero percent real interest. John expects to live another 20 years. So John has $2 million / 20 years = $100K per year. Some unfortunate thing happened and John lost $500K (someone stole the money, unexpected expense, etc.). What would be the new consumption plan? Presumably, it would be $1.5 million / 20 years = $75K per year. Note that John is spreading the loss over all 20 years of his remaining life. It would be a bit odd if he said his short term goals are sacrosanct, and he will continue to spend $100K for 5 years and then drop to $66,667 for the last 15 years. Why are his near term goals more important than his longer term goals? There could be good reasons for it (inability to adjust fixed expenses like housing for example), but the question has to be asked and thought about.

Translating that to your situation, the question would be why is consumption in the 3 years of potential future unemployment more untouchable than the consumption during your planned retirement? You might have good reasons for it, but it's worth thinking about. The important thing to realize is that just because retirement is further away, doesn't reduce the risk you're taking on your retirement investments. The gross returns on stocks won't average out. If stocks do badly, you will have to consume less in retirement. Is that easier to stomach/handle than reducing consumption during nearer term unemployment spells? Or should a 20% loss of lifetime wealth result in a 20% reduction in all consumption--now as well as in retirement?

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Re: Where to put the money saved for home down payment?

Post by alluringreality » Fri Nov 29, 2019 7:59 pm

Ben Mathew wrote:
Fri Nov 29, 2019 3:12 pm
There is no reason why short term planned consumption should be more sacrosanct than long term planned consumption, unless the short term planned consumption is hard to adjust (for example, reducing housing expenses in the near term is hard because it would involve moving).
There are possible reasons why it might make sense to prioritize near-term goals. In the realm of housing, purchasing a home might redirect current rent payments into some equity in a property. Being able to lock in a loan rate might also make sense over time. There are far more possibilities, these just happen to be ones from our own situation. I expect the intrinsic value of our house hasn't really kept up with the taxable appreciation of more than 30% over 4 years, yet buying at least means a smaller percentage of thousands of dollars in rent have been directed to another person. Also mortgage rates from that time were lower than today. It's entirely possible that a downturn could again mean lower housing prices, yet there are certainly reasons to use assets. I figure purchasing a house may tend to retain more value in certain situations than some other forms of "consumption".

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Re: Where to put the money saved for home down payment?

Post by Lee_WSP » Sat Nov 30, 2019 10:18 pm

alluringreality wrote:
Fri Nov 29, 2019 7:59 pm
Ben Mathew wrote:
Fri Nov 29, 2019 3:12 pm
There is no reason why short term planned consumption should be more sacrosanct than long term planned consumption, unless the short term planned consumption is hard to adjust (for example, reducing housing expenses in the near term is hard because it would involve moving).
There are possible reasons why it might make sense to prioritize near-term goals. In the realm of housing, purchasing a home might redirect current rent payments into some equity in a property. Being able to lock in a loan rate might also make sense over time. There are far more possibilities, these just happen to be ones from our own situation. I expect the intrinsic value of our house hasn't really kept up with the taxable appreciation of more than 30% over 4 years, yet buying at least means a smaller percentage of thousands of dollars in rent have been directed to another person. Also mortgage rates from that time were lower than today. It's entirely possible that a downturn could again mean lower housing prices, yet there are certainly reasons to use assets. I figure purchasing a house may tend to retain more value in certain situations than some other forms of "consumption".
But are you really going to buy when the stock market is tanking?

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Re: Where to put the money saved for home down payment?

Post by alluringreality » Sun Dec 01, 2019 12:36 am

Lee_WSP wrote:
Sat Nov 30, 2019 10:18 pm
But are you really going to buy when the stock market is tanking?
Sure, why not, especially if you can get a better price from less demand? I think bear markets have averaged nearly three years for decline and recovery, so I would tend to have other considerations than stock prices for buying over a period of multiple years. Realistically I'd have to make a judgment call about how the downturn is likely to affect our industry, but in theory it seems possibly like a better time to buy than the current seller's market where I live.

(Decline and recovery time listed here is probably too short. Total time underwater is likely longer than 3 year average stated.)
Last edited by alluringreality on Wed Dec 04, 2019 8:58 pm, edited 1 time in total.

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Re: Where to put the money saved for home down payment?

Post by Random Musings » Sun Dec 01, 2019 1:03 am

Not sure what OP holdings are in aggregate in order to decide on that portion of holdings. For example, if those savings constitute a large portion of portfolio, holding CD's and the like make sense. If those dollars are just a small portion of the portfolio, then the idea of just having it as part of the total portfolio allocation may make more sense. However, some people will still put that money in a separate bucket anyway, as that method is comforting to them.

Another item is that the OP seems unsure about timeframe of future purchase, as changes have occurred. That is pretty open ended.

I'm also becoming more wary of drawdown statistics with Wellesley, bond funds and the like as rates historically are on the low side. Bonds are usually a ballast when equity markets go down, but never can discount inflation risks completely. With the yield curve so flat, I would stick with lower duration vehicles if going that route.

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Re: Where to put the money saved for home down payment?

Post by wyoming82240 » Sun Dec 01, 2019 1:11 am

Random Musings wrote:
Sun Dec 01, 2019 1:03 am
Not sure what OP holdings are in aggregate in order to decide on that portion of holdings. For example, if those savings constitute a large portion of portfolio, holding CD's and the like make sense. If those dollars are just a small portion of the portfolio, then the idea of just having it as part of the total portfolio allocation may make more sense. However, some people will still put that money in a separate bucket anyway, as that method is comforting to them.

Another item is that the OP seems unsure about timeframe of future purchase, as changes have occurred. That is pretty open ended.

I'm also becoming more wary of drawdown statistics with Wellesley, bond funds and the like as rates historically are on the low side. Bonds are usually a ballast when equity markets go down, but never can discount inflation risks completely. With the yield curve so flat, I would stick with lower duration vehicles if going that route.

RM
The money I set aside for home down payment is roughly 15% of net worth, rest is invested in equity (85% domestic, 15% international).

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Re: Where to put the money saved for home down payment?

Post by Lee_WSP » Sun Dec 01, 2019 7:46 pm

alluringreality wrote:
Sun Dec 01, 2019 12:36 am
Lee_WSP wrote:
Sat Nov 30, 2019 10:18 pm
But are you really going to buy when the stock market is tanking?
Sure, why not, especially if you can get a better price from less demand? I think bear markets have averaged nearly three years for decline and recovery, so I would tend to have other considerations than stock prices for buying over a period of multiple years. Realistically I'd have to make a judgment call about how the downturn is likely to affect our industry, but in theory it seems possibly like a better time to buy than the current seller's market where I live.
If stocks are down, but housing is not (I'm actually unaware of a major crash when this wasn't true, 2009 housing didn't bottom out until 2011), your buying housing high. You're better off buying more stocks.

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Re: Where to put the money saved for home down payment?

Post by alluringreality » Mon Dec 02, 2019 10:11 am

Lee_WSP wrote:
Sun Dec 01, 2019 7:46 pm
If stocks are down, but housing is not (I'm actually unaware of a major crash when this wasn't true, 2009 housing didn't bottom out until 2011), your buying housing high. You're better off buying more stocks.
The S&P 500 was still underwater in 2011, so if someone like the original poster has a stock-heavy portfolio, they're not necessarily positioning themselves to buy housing when demand falls and it's cheaper. Basically Ben Matthew was advocating for just sticking with a stock-heavy portfolio, which to me does not fit well with buying housing near a low point. As previously noted, bear markets tend to last multiple years, and both the bear market after 2000 and 2008 look like reasonable times to consider buying a house sometime after stock prices have fallen. Having some money in investments with less downside potential than stocks seems like a reasonable way to position for buying housing in the future, possibly at a lower cost.

Personally I bought in 2015, which was clearly not the bottom of the housing market. During closing we were told the previous owner was still underwater on their loan, and they had to write a check for more than 15% of the selling price. The house fit various needs for us, and locally that time was at least a far better time to buy than the last couple years. For various reasons, I tend to think it's possible there could be more downside risk for US stocks in the next 5 years than the last 5 years, so basically my thinking was more in line with the earlier replies in the thread suggesting that it might make sense to go with investments with less downside risk than stocks for the given timeframe. Of course time will tell, but personally I like a good deal and wouldn't choose to be 100% stock if I was considering buying a house with an indefinite timeframe of 5 years or less.

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Re: Where to put the money saved for home down payment?

Post by Lee_WSP » Mon Dec 02, 2019 12:50 pm

alluringreality wrote:
Mon Dec 02, 2019 10:11 am
Lee_WSP wrote:
Sun Dec 01, 2019 7:46 pm
If stocks are down, but housing is not (I'm actually unaware of a major crash when this wasn't true, 2009 housing didn't bottom out until 2011), your buying housing high. You're better off buying more stocks.
The S&P 500 was still underwater in 2011, so if someone like the original poster has a stock-heavy portfolio, they're not necessarily positioning themselves to buy housing when demand falls and it's cheaper. Basically Ben Matthew was advocating for just sticking with a stock-heavy portfolio, which to me does not fit well with buying housing near a low point. As previously noted, bear markets tend to last multiple years, and both the bear market after 2000 and 2008 look like reasonable times to consider buying a house sometime after stock prices have fallen. Having some money in investments with less downside potential than stocks seems like a reasonable way to position for buying housing in the future, possibly at a lower cost.

Personally I bought in 2015, which was clearly not the bottom of the housing market. During closing we were told the previous owner was still underwater on their loan, and they had to write a check for more than 15% of the selling price. The house fit various needs for us, and locally that time was at least a far better time to buy than the last couple years. For various reasons, I tend to think it's possible there could be more downside risk for US stocks in the next 5 years than the last 5 years, so basically my thinking was more in line with the earlier replies in the thread suggesting that it might make sense to go with investments with less downside risk than stocks for the given timeframe. Of course time will tell, but personally I like a good deal and wouldn't choose to be 100% stock if I was considering buying a house with an indefinite timeframe of 5 years or less.

I think we’re on the same page. People’s actual appetite and ability to absorb risk is usually a lot lower than they think.

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